Thursday, August 10, 2017

Kim Jong-un is making today's headlines with his threats to attack Guam in short order and somewhere in the US at a later date—and to attack with nuclear weapons no less. He's also sparked a mini panic attack in global markets. But so far, markets have been quite blasé about the threat that North Korea poses. The chart below puts things in perspective, as of 7 am beach time:

Believe it or not, the threat of imminent nuclear hostilities is (so far) just a blip on the market's radar screen. About as big as the threat of a Frexit, but far less than Brexit, collapsing oil prices, or a Chinese economic implosion. If you want protection from a nuclear holocaust, options are still relatively cheap, with the Vix this morning trading around 14-15, up from a very low 10 a few days ago.

So either the market is ridiculously unconcerned, or the market rates the chances of a nuclear explosion as remote. Considering that the So. Korea stock market is down less than 4% in the past few weeks, it's probably the latter. (You would think Seoul has the most to lose if Kim Jong-un gets crazy enough to start pushing launch buttons.) I note as well that gold is up only 2% or so in the past week.

It's also worth noting that industrial metals prices yesterday reached an 18-month high, having risen more that 60% from their January 2016 low, as the chart above shows. That's pretty impressive, and it suggests that global economic activity has definitely perked up.

I'm reminded of the fact that the recession of 2001 ended just a few months after the 9/11 attack. The US economy is amazingly resilient, and the global economy perhaps just as resilient.

Crypto currencies now number a staggering 1048 (https://coinmarketcap.com/all/views/all/) so it's hard to ignore this rapidly growing market. There are obvious advantages to these computerized currencies, but there are disadvantages as well. The biggest disadvantage is their (at least up to now) extreme volatility vis a vis established currencies. I can't see crypto currencies becoming a widely-used medium of exchange until they become far less volatile. In the meantime they are properly classified as highly speculative investments, not cash substitutes. Caveat emptor.

Market participants have been calling "wolf" on the next externality for years -- FED market pumping insures that nothing happens. Participants know that the market is largely price for perfection, and has been for a rather long time, and perfection has been on offer, especially since Trump was nominated -- less regulations lower taxes, but what has not been priced in is the risk that externalities will come and destroy this card castle.

North Korea could be nothing, although to hear the "stories" is that President Trump was not scheduled to speak about the "crisis" but rather opioids. Maybe America is getting ready for war in Korea, but to be realistic the "stories" about America having a military plan to deal with North Korea is not a surprise -- it is the job of America's armed forces to have plans in place for all types of events. President Trump is like Truman (look it up!) He only got interested in the impact of war after the body count mounted on his watch...

Will it really be North Korea or Iran, its clear that President Trump is looking at Bush 43 and saying: "War worked for him!"

Regarding cryptocurrencies I am looking to answer why there is a market for them and where they might be heading, not necessarily whether or not they are a legitimate or sound investment. I am very skeptical of all things hyped but in this case it seems there are valid market oriented reasons they are standing up.

I'm looking at textbook answers for why alternate mediums of exchange, units of measure, stores of value develop. One seemingly obvious reason is that they can circumvent inefficiencies like transaction costs and regulations in the standard central bank controlled currency markets.

Just to clarify, I am not against central bank/consumer/commercial banking.